Not the Exceptions to the Rule

In yesterday's post, "Bad C's," I highlighted a few reports that lent further weight to the notion that the financial sector has not been a paragon of virtue, to put it mildly. Yet while many banks and brokers have engaged in some pretty bad behavior -- which, among other things, helped bring about the worst financial crisis this century --they are apparently not the exceptions to the rule, as jr deputy accountant reveals in "Accounting 'Irregularities' on the Rise in the Recession":

Reuters is reporting accounting fudging and fraud are on the rise in the US as a result of "pressures" for companies to perform despite the hostile economic environment.

Sure, there's that and then there are also the auditors but we'll leave them be for now, it's Friday and we're feeling nice.

Reuters:

Corporate balance sheets may be showing signs of the wear and tear from the prolonged U.S. recession as accounting irregularities are starting to surface at growing numbers of U.S. companies.

"When things get difficult companies tend to stretch even further and utilize whatever games that they can get away with and sometimes they don't get away with them," David Tice, chief portfolio strategist for bear markets at Federated Investors, said in an interview with Reuters television on Wednesday.

Accounting irregularities are increasingly showing up in U.S. regulatory filings and corporate announcements.

Shares of Apollo Group Inc (APOL) sank 18 percent on Wednesday after the parent of University of Phoenix said the U.S. Securities and Exchange Commission had launched an informal inquiry into its revenue recognition practices.

Apollo is just one of several big name companies that have disclosed they have accounting issues over the last few weeks.

Internet retailer Overstock.com (OSTK) said last month that it was under scrutiny from government regulators over the way it accounted for some expenses. The company restated financial results in 2006 and 2008.

New York Sports Clubs owner Town Sports International Holdings Inc (CLUB) said last month that the SEC was formally investigating its deferral of certain payroll costs related to membership sales.

And jewelry chain Zale Corp (ZLC) said it will report fourth-quarter financial results on Thursday, after it twice-delayed its earnings results due to an accounting review of prepaid advertising costs.

"Statistically you can show any time you have a recession or some type of tremendous decline in an economy you're going to see financial pressures on companies," said Bruce Dorris, program director at the Association of Certified Fraud Examiners, noting that corporate employees can sometimes be motivated to be overly aggressive with accounting or commit outright fraud to meet targets, particularly in difficult economic times.

Fraud in non-financial sectors? Say it ain't so. Well why should auditors and management be committed to truthful accounting if the example set by our powers that be is to deny, deny, deny?

Professor of Economics and Law at the University of Missouri and senior regulator during the S&L crisis of the 1980s, William Black blamed "a massive fraud" for the economic crisis on Bill Moyers earlier this year:

[They] don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up....

Geithner is ... covering up. Just like Paulson did before him....

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed....

Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts....

[Question] Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

[Black] Absolutely....

They're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

[Question] So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse."

Move along now, nothing to see on these cash flows...

Comments

[Jr Deputy Accountant]

you are too good to me, Michael, thank you! :)

[Mark G.]

"In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy."

Justice Louis Brandeis

[roger]

Lying,cheating,misrepresentation of products,
is a daily hassle when shopping.Attempts to
brainwash children and manipulate the adults thinking
is the norm in our culture.Should we be surprised
that when big money is involved, dishonesty is total

[Geoff M]

It's funny the cycle between truth and obfuscation that we're endlessly going through on this crisis.

It starts off - subprime crashes, the problem is obfuscation, we need truth (what is really in the securitised debt products, who holds it, who can come clean and write it off sooner) ...

Then as the clouds of obfuscation clear, they discover that the problem is really bad and that the truth will hurt financially really badly too, so they go back to obfuscation - accounting fiddles, mark to make believe disguised via mark to govt backstopped market, policy fiddles, Ben's helicopter, QE, poverty obfuscated as prosperity...

The next stage is capitulation - yes the truth will hurt, but the obfuscation policy response cost us so much that our situation is now truly, completely f'ed and we can't lose much more by coming clean.

My bet is that all we ever really need is truth. Won't feel like the breath of fresh air it could have been way back, but it will be essential to a return to moderate prosperity - via a new Great Depression. Time to come clean about that, too.